Paper F5 Performance Management Final Mock Exam June 2013 Session

Time allowed: Reading and Planning: Writing: 15 minutes 3 hours

All five questions are compulsory and must be attempted Total Marks: 100

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Question # 1 Scotswood Ltd is an engineering company which is organised for management purposes in the form of several autonomous divisions. The performance of each division is currently measured by calculation of its return on investment (ROI). Scotswood Ltd's current performance management policy is to calculate ROI by dividing the profit before interest and tax by the book value of net assets (Total assets less current liabilities and excluding cash). Depreciation is on a straight-line basis and is charged in full in the year the asset is acquired. The divisional management teams are paid a performance-related bonus conditional upon achievement of a 15% ROI target. On 15 December 20X9 the divisional managers were provided with performance forecasts for 20X9 which included the following. Divisional investment at 31 December 20X9 5,500,000 925,000 20X9 Profit before interest and tax 816,750 203,500

Forecast Division Aye Division Bee

ROI 14.85% 22.00%

In order to achieve the 15% target the Divisional Director of Division Aye held a meeting with his management team on 15 December. Logistics Manager: 'We can achieve our 20X9 target by deferring payment of a 90,000 trade debt payable tomorrow until 1 January. I should add that we will thereby immediately incur a 2,000 late payment penalty.' Production Manager: 'We should replace a number of our oldest machines (which are fully written down in the accounts) at a cost of 300,000. The new equipment will have a life of ten years and generate cost savings of 29,000 per year. The new equipment can be on site and operational by 31 December 20X9.' Divisional Accountant: 'The existing method of performance appraisal is unfair. We should ask head office to adopt residual income (RI) as the key performance indicator, using the company's cost of capital of 10% to calculate the imputed finance charge.' Required: (a) Comment on the suggestions put forward by each of the three managers. Indicate what impact the suggestions will have on the annual bonus award and the division as a whole. Your answer should be supported by appropriate calculations (15 marks) (b) Explain, with the use of examples, the value and purpose of non-financial performance measures. (5 marks) (Total: 20 marks)

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Question # 2 Faith Co is a business services company which provides seminars on various aspects of current and recently announced changes in employment legislation. Faith Co has decided to enter into a one-year renewable contract with Peace Business Associates, which owns large premises that are suitable for holding educational seminars in each of eight cities. Peace Business Associates has offered a choice of four different contracts, each of which relates to seminar rooms of differing sizes. These are known as room types A, B, C and D, which are capable of accommodating 100, 200, 300 and 400 delegates respectively. Faith Co will charge an all-inclusive fee of $80 per delegate at every seminar throughout the year. Faith Co must decide in advance of the forthcoming year which size of conference room to contract for. It is not possible to contract for a different size conference room in different cities, ie only one size of room can be the subject of the contract with Piece Business Associates. Due to the rapid growth in interest regarding environmental issues and corporate social responsibility, and the large amount of forthcoming legislative changes, Faith Co has decided to hold one seminar in every week of the year in each city. Sometimes a regional government representative will attend and speak at such seminars. On other occasions a national government representative will attend and speak at such seminars. The rest of the time the speakers at seminars are representatives from within Faith Co. Faith Co has estimated the following frequency regarding seminars to be held during the forthcoming year: Category of speaker: Faith representive Regional govt. representative National govt. representative % 20 50 30

Market research has indicated that where a national government representative is in attendance, Faith Co can be reasonably assured of selling 400 seminar places and where a regional government representative is in attendance 200 seminar places can be sold. Faith Co expects to sell only 100 seminar places when there is no attendance by a government representative. The following contribution table has been devised to calculate the expected annual contribution from each decision option. Contribution if 100 places available $ 832,000 832,000 832,000 Contribution if 200 places available $ (1,164,800) 2,163,200 2,163,200 Contribution if 300 places available $ (2,662,400) 665,600 3,993,600 Contribution if 400 places available $ (3,328,000) 0 6,656,000

Places sold 100 200 400 Required

(a) Calculate the cost incurred by Faith Co for each type of room per seminar.

(4 marks)

(b) (i) Advise Faith Co on the size of seminar room that should be contracted from Peace Business Associates, using the criterion of expected value. Your answer should use the expected annual contribution from each decision option. (ii) Explain the limitations of the expected value approach. (6 marks)

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(c) Determine whether your decision in (a) would change if you were to use the maximin and minimax regret decision criteria. Your answer should be supported by relevant workings. (5 marks) (d) Explain possible sources of information and information systems that will be required to reduce uncertainty for Faith Co. (5 marks) (Total 20 marks)

Question # 3 Puppycare Company is a dog grooming service. They provide two services, the Scottie and the Labrador. The Scottie is a short service which is wash and comb and the all over Labrador includes a wash, condition, comb, nail clip and blow dry. Both services involve the same resources, just in different quantities. The cost cards for both services are listed below: Scottie $ per service Selling price Specialised cleaning material ($5 per litre) Direct labour ($7.5 per hour) Variable machine time ($3 per hour) Fixed overhead ($3 per labour hour) Profit 13.25 0.50 3.75 1.50 1.50 -----6.00 Labrador $ per service 24.00 0.75 7.50 0.75 3.00 ------12.00

Puppycare Company budgets to sell 240 Scotties and 226 Labrador per month. However, the company is facing a shortage of resources over the next month. The maximum amount of specialized cleaning material available is 60 litres, the total labour available is 300 hours and the total machine time available is 150 hours. Crufts will be on in the next month and Puppycare Company has a contract to provide 25 Scotties and 50 Labradors in 2nd week of the month. If Puppycare Company does not honour this contract it will be fined a healthy amount and be left shame faced in the dog world. Required: (a) Using linear programming advice Puppycare of the best mix of services to provide maximum contribution. (10 marks) (b) Find the shadow price for machine hours and specialized cleaning material. (5 marks)

(c) Historically, the company has used solely financial performance measures to assess the performance of the company as a whole. The companys Managing Director has recently heard of the building block model and is keen to learn more. Required: Briefly describe the building block model approach to performance measurement. (5 marks) (Total 20 marks)

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Question # 4 Piyano Ltd makes and sells three types of home appliances for which the following budget/standard information is available for the previous period: Sales Units 800 600 300 Revenue $ 16,000 24,000 18,000 Costs $ 12,000 22,200 16,800 Profit $ 4,000 1,800 1,200

TV DVD AC

Actual sales were 560 units of TV, 1,260 units of DVD and 250 units of AC. Company managements are able to control the relative sales of each product through the allocation of sales effort, advertising and sales promotion expenses. Required (a) Calculate the sales volume variances, the sales mix variances and the sales quantity variances for the three products. (6 marks) (b) Comment on the likely reasons for the variances in part (a). (4 marks)

(c) The company is also considering the launch of a new product, Microwave Oven, and has provided you with the following information: Microwave Oven Variable cost Fixed cost Total cost Standard cost per box $ 6.20 1.60 -----7.80

Market research forecast of demand Selling price ($) Demand (boxes) 12 6,000 11 7,200 10 11,200 9 13,400

The company only has enough production capacity to make 7,000 boxes. However, it would be possible to purchase Microwave Oven from a sub-contractor at $7.75 per box for orders up to 5,000 boxes, and $7 per box if the orders exceed 5,000 boxes. Required: Prepare and present a computation that illustrates which price should be selected in order to maximise profits. (5 marks) (d) Explain the meaning of the term environmental management accounting, and illustrate how it can help managers to manage environmental costs more effectively. (5 marks) (Total 20 marks)

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Question # 5 Metallica Ltd manufactures and sells computers. It is investigating the financial viability of a new product the Leaf. The Leaf is a laptop computer and, if launched, it will be the thinnest laptop available on the market. Initial design, development, production set-up and marketing costs have been significant. However, if the product is launched, direct labour costs will decrease over time. The product is only expected to have a life of 18 months, due to the highly competitive and fast moving nature of the industry. The following estimated information is available for the Leaf: 1. Sales should be 1,400 units in the 18 month period. The company establishes the selling price by calculating the cost per unit and adding a 25% mark-up. 2. A 75% learning curve will apply for the first 900 units after which a steady state production time will apply. The labour time per unit after the first 900 units will be equal to the time for the 900th unit. The cost of the first unit was measured at $5,000. This was for 500 hours at $10 per hour. 3. The variable overhead is estimated at $3 per labour hour. 4. Direct material will be $600 per unit for the first 300 units produced. The second 300 units will cost 80% of the cost per unit of the first 300 units. All units from then on will cost 80% of the unit cost for each of the second 300 units. 5. The Leaf will require additional machines and factory space to be rented, at a fixed cost of $11,000 per month. Note: The learning curve formula is given on the formulae sheet. At the learning rate of 0.75 (75%), the learning factor (b) is equal to -0.4150. Required: (a) Explain the impact of the learning effect on budgeting in Metallica Ltd. (2 marks)

(b) What is the minimum price per unit that the company should quote for each Leaf? Ignore any design, development, set-up and marketing costs. (10 marks) (c) Discuss the relevance of the learning curve in a modern manufacturing environment, such as that found in Metallica Ltd. (4 marks) (d) Discuss how life cycle costing could be applied to Metallica Ltd. (4 marks)

(Total: 20 marks)

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